Risks and uncertainties

Exposure to risk, both operational and financial, is a natural part of business activity, as reflected in Bufab’s approach to risk management. The aim is to identify and prevent risks and to limit any loss or damage from these risks. The most significant risks to which the group is exposed are related to the economy’s bearing on customer demand.

Market and business risks Customer demand for products and services from Bufab depends on general economic conditions and the level of activity in the manufacturing industry in the countries in which Bufab and its customers operate.

Bufab operates in Sweden, Denmark, Finland, Norway, Germany, France, the Netherlands, Austria, the Czech Republic, Poland, the UK, Ireland, Estonia, Hungary, Spain, Slovakia, India, the United States, Taiwan, China, Russia, Turkey, Romania, Singapore, Malaysia, Indonesia, Mexico and Thailand.

Bufab’s customers are found in a wide spectrum of manufacturing industries, including the technology sector, electronics/telecommunications, consumer goods, the offshore and refining industry, the transportation and construction sectors, furniture and the automotive sector. Geographical diversification combined with a vast number of customers spread across many sectors reduces the effects of isolated changes in customer demand.

However, despite this breadth, it can be stated that the company is clearly impacted by customers’ underlying demand, which is considered to comprise the company’s most tangible operational risk. The company was substantially impacted by reduced customer demand during the sharp global economic downturn in 2009, but also during parts of the pandemic year of 2020.

There is a risk that major customers will choose to bypass the whole-sale stage and deal directly with manufacturers. However, Bufab adds value to its customers by providing, for example, technically competent, efficient logistics and a broad base of suppliers, as well as a reliable level of quality. The company believes that this broad range as a logistics partner remains competitive.

Bufab can be negatively impacted when its suppliers experience economic, legal or operational problems, raise prices or when they are unable to deliver on time or at the agreed level of quality. Bufab sources most of its goods from suppliers that are mainly located in Asia and Europe. Bufab works actively with a large number of suppliers from different countries. The company aims to avoid making itself dependent on specific suppliers. These risk-minimising measures contributed to the company performing well despite the strained global supply chains experienced in 2021, which led to delivery and capacity issues for several suppliers.

Inventories constitute a significant share of Bufab’s assets and are costly to relocate, store and manage. Accordingly, efficient inventory management is a key element in Bufab’s operation. Inefficient inventory management can lead to inventory surpluses or deficits. Inventory surpluses expose Bufab to the risk of having to incur impairment losses on or to dispose of the inventory. Conversely, inventory deficits expose Bufab to the risk of having to source products at higher prices in order to deliver on time, or to incur expensive express delivery costs or penalties.

With its large and complex flow of items combined with a broad base of customers and suppliers, there is a risk that Bufab’s customers will not receive their products at the specified time or with the right quality. Bufab may become subject to significant product liability and other claims if the products it sources and produces are defective, cause production stops or personal or property damage, or otherwise do not fulfil the requirements agreed with the customer. Such defects may be caused by mistakes made by Bufab’s own personnel or the company’s suppliers. If a product is defective, Bufab may also have to recall the product. Furthermore, Bufab may not be able to file or collect a corresponding claim against, for example, its own suppliers in order to receive compensation for damages and related costs. To address this risk, internal and external processes are in place that must be adhered to by employees and external parties. Bufab works continuously to develop these processes and to train employees and external parties.

Bufab could lose business or growth opportunities from existing customers as a result of many factors, including, but not limited to, relocations of the customers’ manufacturing operations or customer dissatisfaction, particularly with product quality or service, as well as customers underperforming in, or shutting down, their businesses. In connection with a customer relocating manufacturing operations, for example, to a low-cost country, Bufab may not be requested, or be able, to make deliveries to the new location to the same extent as prior to the relocation, or may not be able to efficiently source all, or any, of its products to the new location. Moreover, should customers relocate outside of Bufab’s operating jurisdictions, it may be difficult or burdensome for Bufab to establish new operations and comply with local regulations in such locations. As a consequence, Bufab may lose all, or part of, its business from that manufacturing operation.

Bufab’s supply chain (including manufacturing units and some ware-houses) and business processes are, to a large extent, automated via hardware and software for robotics and via the Group’s IT systems. Bufab is particularly dependent on these systems to purchase, sell and deliver products, to invoice its customers and to manage its production units and certain automated warehouses. It is also an important tool for accounting and financial reporting as well as inventory and net working capital management. Disruptions, as a consequence of, for example, upgrades of existing IT systems, or deficiencies that materialise in the function of its IT systems or hardware could, even in the short term, adversely affect Bufab’s business, results of operations and financial condition.

Bufab’s strategy covers both organic growth and growth through acquisitions. Acquisitions may expose Bufab to risks, primarily related to integration, such as impairment of relationships with key customers, inability to retain key employees and difficulties and higher costs than anticipated for combining operations. Following some of its past acquisitions, Bufab has experienced such integration difficulties. Moreover, acquisitions may expose Bufab to unknown liabilities.

There is considerable uncertainty about the operational and macro-economic effects of Brexit. As regards Brexit, Bufab has taken several operative steps to reduce any adverse impact on the Group and minimise risks. The Group is monitoring the situation carefully.

The recent years’ coronavirus pandemic is a substantial uncertainty factor, particularly regarding future demand, but also in terms of its impact on the Group’s operations and global supply chains. We are monitoring developments carefully and working actively with customers and suppliers to manage the situation.

The war in Ukraine is a factor of uncertainty, especially when it comes to demand going forward. However, the Group’s exposure in Russia and Ukraine amounts to only approximately 0.5 percent of the Group’s total net sales. Operations in Russia have been paused and we are following developments closely and evaluating the long-term consequences that the war may have on this activity.

Bufab manages its operations through operating subsidiaries in a number of countries. The business, including transactions between Group companies, is run according to Bufab’s understanding or interpretation of current tax laws, tax treaties, other tax law stipulations and the requirements of the tax authorities concerned. Furthermore, the tax authorities of the countries concerned could make assessments and take decisions which deviate from Bufab’s understanding or interpretation of the abovementioned laws, treaties and other regulations. Bufab’s tax position, both for previous years and the current year, may change as a result of the decisions of the tax authorities concerned or as a result of changed laws, treaties and other regulations. Such decisions or changes, possibly retroactive, could adversely affect Bufab’s business, results of operations and financial condition.

Bufab holds environmental permits for manufacturing at its production facilities. Bufab previously conducted manufacturing at other facilities in Sweden. Bufab has completed environmental inventories and, where required, environmental technical investigations, at all properties where Bufab has historically conducted manufacturing in Sweden. These investigations detected traces of contamination at or in proximity to some of these properties. For more information regarding environmental risks, refer to Note 31.

Bufab has a substantial goodwill item in its consolidated balance sheet, Which is regularly tested for impairment requirements; see also Note 16.

Bufab is exposed to fluctuations in the market price of certain commodities, particularly steel, stainless steel (which fluctuates with the price of alloy metals) and other metals. Any increase in such prices may impact the price for which Bufab purchases its products, and thereby the cost of goods sold. Energy prices and the price of oil impact manufacturing and freight costs, which significantly affect cost of goods sold. Freight costs could also be affected significantly by fluctuating capacity in the global supply chains. In addition, labour shortages and labour costs in the countries from which Bufab sources its products may increase Bufab’s cost of goods sold through its purchasing prices. Moreover, Bufab may not be able to compensate for increased sourcing prices by raising prices for its own customers.

Bufab acts as a subcontractor to the engineering industry and faces competition in all types of customer segments. Customer requirements concerning price, quality, delivery reliability, etc. are constantly increasing. Since the entry barriers for smaller companies and the investments required to start a competing business are low, Bufab can also lose sales to new companies. The company’s continued success is dependent on its ability to respond to these increasing requirements and be more competitive than its competitors in the areas of attractive pricing, delivery reliability, quality, high internal efficiency and broad, secure logistics solutions from all of the countries in which Bufab operates.

Legal risks primarily include legislation and regulation, government decisions, disputes, etc. The fastener industry within Europe and North America has periodically been subject to heavy duties on imports of standard parts from certain geographies, mainly China. Bufab has been forced to find alternative purchasing channels, primarily in Asia, which has worked well considering the volume size. It cannot be ruled out that, for example, the EU or US may introduce increased duties in the future, and there is considerable uncertainty about the extent of such duties.

Bufab’s operations face risks related to taxes and the environment. See also Note 31.

Bufab insures its assets against property damage and business interruption losses. In addition, there are insurance policies for product liability, product recall, transportation, legal protection, crime against property and business travel. There have been no claims for damages with regard to product liability or product recall that had any material impact on earnings during the last decade.

Bufab must have access to competent and motivated employees and ensure access to good leaders as a means of achieving its established strategic and operational targets. Bufab is working in a structured manner to ensure the health and well-being of its employees and that they can find positive challenges in their daily work. Bufab also has a strong focus on safety efforts in all units. Through strategic manpower planning, Bufab can ensure access to persons with the right qualifications at the right time. Recruitment may take place both externally and internally, where internal recruitment is facilitated as vacant positions are advertised both internally and externally. Salaries and other terms and conditions are in line with market conditions and are connected to each subsidiary’s priorities.

Bufab is also striving to
maintain good relationships with trade union organisations. However, securing a skills supply to each subsidiary is always a challenge, given that the labour market is mobile.

Bufab is dependent on IT systems for its ongoing operations. Disruption or faults in critical systems have a direct impact on deliveries of products and services to customers and other important business processes. Incorrect management of financial systems may affect the company’s reporting of results. In addition, the company is exposed to attempts to harm the company through IT-based attacks, such as virus attacks, password and identity theft, or various forms of IT-based fraud or theft. These risks are increasing in an ever-more technically complex and interconnected world. In recent years, Bufab has therefore worked towards more standardised IT processes and an organisation for information security. IT security includes a continuous risk assessment, the implementation of preventive measures and the use of security technologies. Standardised processes exist to implement new systems, to change cur-rent systems as well as for daily operations. A large share of Bufab’s system landscape is based on thoroughly tested products, such as Jeeves.

Bufab is exposed to various types of financial risk in the course of its operations. Examples of these are currency, financing, interest rate and counterparty risks. The Board is responsible for adopting risk-management policies. Financial activities such as risk management, liquidity management and borrowing are managed at the Group level by the subsidiary Bufab International AB.

Changes in exchange rates affect the Group’s earnings and equity in different ways.

Currency risk arises from:
flow exposures in the form of receipts and payments in differentcurrencies,
recognised assets and liabilities of subsidiaries,
translation of the earnings of foreign subsidiaries to SEK,
translation of net assets of foreign subsidiaries to SEK.

Exchange-rate fluctuations may also affect the Group’s competitiveness or that of its customers, thereby indirectly affecting the Group’s sales and earnings. The Group’s overall currency exposure has increased over time as operations have become more global, with increased trade from Asia as well as a higher proportion of sales outside Sweden – from Swedish subsidiaries but mainly from foreign subsidiaries. The Group’s currency risk management policy primarily focuses on transaction-related currency risks. Currency risks are mainly managed by price adjustments to customers and suppliers, and by working to change the business’s operating terms by aligning revenues and costs in currencies other than SEK with each other.

Some 82 percent (81) of the Group’s total invoicing and 88 percent (85) of its costs are in foreign currencies. Flow exposure in 2021 was marginally hedged at fixed exchange rates.

During the financial year, the Group’s currency flows (excluding the reporting currency, SEK) were distributed as follows (amounts in SEK million).

Currency

The company’s largest exposure is to the USD, as trade from Asia is largely conducted in this currency, and to the EUR, as a large proportion of its European sales are in this currency.

Net assets in foreign subsidiaries correspond to investments in foreign currencies that give rise to translation differences when they are translated to SEK. Loans were raised in EUR, GBP and USD to reduce the effect of translation differences on the Group’s comprehensive income and capital structure. Exchange-rate gains and exchange-rate losses on these loans are considered to be effective hedges, as defined by IFRS, of translation differences and are recognised in other comprehensive income and the accumulated amount in equity. During 2021 and 2020, the Group had some of its lending in foreign currencies with the aim of reducing the impact of currency exposure on Group’s equity that originates from companies with net assets in the currency in question. The effectiveness of the hedge is assessed when entering into a hedging relationship. The hedged item and hedge instrument is then assessed regularly to ensure the conditions satisfy requirements. Total borrowing in foreign currencies defined as hedging instruments amounted to EUR 25 million (21) and GBP 22 million (16), respectively, at 31 December 2021. For a specification refer to Note 37. Refer also to the consolidated statement of comprehensive income and the consolidated statement of changes in equity.

Credit risk related to cash and cash equivalents, balances and credit exposures are managed at the Group level. Credit risk related to receivables outstanding are managed by the company in which the receivable was created. The company conducts individual assessments of its customers’ credit ratings and credit risks, including customers’ financial position, as well as previous experiences and other factors. The management does not anticipate any losses due to missing payments from counter-parties other than the amount reserved as “doubtful debts.” Provisions are made for trade receivables and contract assets in accordance with the Group’s loss risk provision model. The Group therefore makes provisions for trade receivables based on the Group’s expected losses based on a historic model of expected losses in each age category. Indications that specific impairment is required include the Group’s assessment that there is no reasonable expectation of repayment since the debtor is failing to comply with the repayment plan. When a debtor’s payments have fallen due by more than 180 days, half of the value of the receivable is written off in line with the Group’s loss risk provision model. When a debtor’s payments have fallen due by more than 360 days, or when there is no reasonable expectation of repayment (for example, bankruptcy) the full value of the receivable is written off. For more information about past-due receivables and multi-year history, see Note 21.

Financing risk is defined as the risk of being unable to meet payment obligations as a result of insufficient liquidity or difficulties in obtaining financing. Liquidity risk is managed by ensuring that the Group holds sufficient levels of cash and cash equivalents and access to financing under credit facility agreements. Executive management regularly monitors the need to refinance external loans with the aim of renegotiating the Group’s credit facilities at least 12 months before the maturity date.

The Group receives its primary financing from a bank under an SEK 3,000 million credit facility with a maturity in September 2024. The credit facility was signed in July 2021. This credit is linked to certain borrowing terms (known as covenants), which are detailed in Note 26.

At year-end 2021, the Group had a liquidity reserve in the amount of SEK 1,459 million (1,242). The Group’s finance policy stipulates that the available funds, meaning cash and cash equivalents and available but unutilised credits, must be greater than the Group’s standard expenses for 0.7 of a month. On 31 December 2021, the liquidity reserve totalled 3.1 months’ (3.5) standard expenses for the Group.

The Group’s target for total capital structure is to secure the Group’s ability to continue its operations, in order to generate returns for share-holders and benefits for other stakeholders and to retain a solid capital structure to keep capital costs low. Executive management regularly monitors the need to refinance external loans with the aim of renegotiating the Group’s credit facilities at least 12 months before the maturity date.

The Group has an equity/assets ratio of 36 percent (39), whereby the equity/assets ratio is defined as recognised equity divided by total assets.

Equity 1

The net debt/equity ratio as at 31 December 2021 amounted to 84 per-cent (80), where the net debt/equity ratio is defined as net debt divided by recognised equity.

Equity 2

The following table shows the classification of financial instruments in the balance sheet for 2021 and 2020 (for definition, see Note 2).

The maturity structure for existing borrowings is shown in Note 26. The amounts do not include the current portion, which will mature within one year. The overdraft facility normally matures within one year, but is usually extended on the due date.

The table below illustrates the Group’s financial liabilities categorised by time left to maturity as per balance-sheet date. The amounts shown in the table are the contractual undiscounted cash flows, including estimated future interest payments.

Classification

IFRS 13 Fair Value Measurement is applied. The Group’s borrowings mainly take the form of credit facilities with long-term credit but short fixed-rate periods. Consequently, it is the assessment that the fair value is essentially consistent with the carrying amount.

Changes in interest rates have a direct impact on the Group’s earnings, while their impact on the overall economy also produces an indirect effect. The Group’s bank loans at the end of the year had an average remaining fixed-rate period of three months.

Significant factors affecting the Group’s earnings are described below. The assessment is based on year-end values, assuming all other factors remain constant.

Fluctuations in sales prices are the variable that has the greatest impact on earnings. A change of +/–1 percent on resale prices would affect operating profit by about SEK 59 million (48) and a change of 5 percentage points would have an impact of approximately SEK 259 million (240) on operating profit.

Volume changes and sourcing prices affect Bufab’s earnings. A 1-percentage point change in volume has an effect on earnings of about SEK 18 million (15), while a 5-percentage point change has an effect of about SEK 90 million (75) on operating profit. A 1-percentage point change in merchandise sourcing prices has an effect on earnings of about SEK 37 million (31), while a 5-percentage point change has an effect of about SEK 185 million (155) on operating profit.

Payroll costs represent a large proportion of the Group’s cost base. A 1-percentage point increase affects operating profit by about SEK 7 million (6).

The Group’s net debt was SEK 1,621 million (1,546) on the balance-sheet date. A one percentage point change in the market rate for the closing net debt has an effect on profit after financial items of SEK 16 million (15).

The Group has considerable net currency exposure in terms of translation and transaction effects to the USD. The currency exposure to the USD is related to the company’s operations in North America and trade with Asia, particularly China and Taiwan. Local prices in Asia are largely set on the basis of the USD level. A one percentage point strengthening of the USD against the SEK, with all other variables held constant, has a negative impact of SEK 6 million (neg: 4) on operating profit. In a similar way, a five percentage point strengthening of the USD, with all other variables held constant, has a negative impact of SEK 30 million (neg: 20) on operating profit.

The Group currency exposure to EUR in terms of transaction and translation effects is also substantial. Exposure to the EUR is primarily due to the fact that the Group’s invoicing in Europe is largely in this currency. A one percentage point strengthening of the EUR against SEK, with all other variables held constant, has a positive impact of SEK 5 million (4) on operating profit. In a similar way, a five percentage point strengthening of the EUR, with all other variables held constant, has a positive impact of SEK 25 million (20) on operating profit.

The Group currency exposure to GBP in terms of transaction and translation effects is also substantial. Exposure to the GBP is primarily due to the fact that the Group’s invoicing in the UK is largely in this currency. A one percentage point strengthening of the GBP, with all other variables held constant, has a positive impact of SEK 4 million (2) on operating profit. In a similar way, a five percentage point strengthening of the GBP, with all other variables held constant, has a positive impact of SEK 20 million (10) on operating profit.

The Group’s currency effects with regard to translation effects in foreign net assets is significant, primarily in GBP, EUR and USD. A one percentage point change in the EUR, GBP and USD, respectively, would, notwithstanding any hedges and all other variables held constant, yield a positive impact on the Group’s equity of SEK 6 million (6), SEK 5 million (5) and SEK 2 million (1), respectively. A five percent-age point change in the EUR, GBP and USD, respectively, would, notwithstanding any hedges and all other variables held constant, yield a positive impact on the Group’s equity of SEK 30 million (30), SEK 25 million (25) and SEK 10 million (5), respectively. For information on the hedging of foreign net assets, see Note 37.